Building confidence improves, but not yet past halfway mark - index

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Cape Town - Although it looks like growth in the building sector in South Africa started 2018 off on a stable footing, its outlook should be viewed with caution, according to John Loos, property economist at FNB.

He commented on the latest FNB/BER Building Confidence Index released on Monday.

The index rose to 43 in the first quarter of 2018 from 31 in the fourth quarter of 2017, where zero would indicate an extreme lack of confidence and 100 would mean extreme confidence. The current index level, therefore, indicates that nearly 60% of respondents are dissatisfied with prevailing business conditions.

The index looks at the percentage of respondents satisfied with prevailing business conditions in six sub-sectors. The six sub-sectors are architects, quantity surveyors, main contractors, sub-contractors, manufacturers of building materials and retailers of building material and hardware.

Higher activity - especially among non-residential main contractors - and improved business conditions lifted confidence, according to Loos.

He added, though, that it is uncertain what lifted non-residential activity so significantly in the first quarter. Therefore, one should "interpreted it with caution". At the same time residential activity was largely unchanged.

"The building pipeline has not improved and general economic conditions continue to point to lacklustre - although higher than in the recent past - gross domestic product (GDP) growth. This is important as the non-residential sector typically lags growth in other sectors,” said Loos.

To him the broad-based nature of the improvement - in all but one of the sub-sectors - is of importance. The latest index shows that all the sub-sectors, except quantity surveyors, registered higher confidence levels in the first quarter of 2018 compared to the fourth quarter of 2017.

The main contractor increase in confidence was due to an improvement in building activity, especially in the non-residential sector. According to Loos, non-residential contractors have underperformed noticeably compared to residential contractors over the past few quarters, so this rebound is a "positive surprise" to him.

He pointed out that the increase is off a low base, however, and the magnitude of the improvement will be difficult to sustain going forward.

The biggest increase in confidence (up 29 index points) was among building material manufacturers.

“While the higher confidence was supported by better domestic sales and production, it was export sales and export order volumes which provided the biggest lift,” said Loos. At the same time, he pointed out that the confidence of building material manufacturers can be quite volatile.

As for hardware retailers, the improvement in sales and orders made them feel that business conditions are noticeably better than this time last year.

At the start of the building pipeline, architect confidence increased to 43 index points, while the confidence of quantity surveyors shed 7 points to register a level of 31. A similar trend was seen regarding activity. Architects generally reported higher activity, while quantity surveyor activity levels remained weak.